Lockheed Martin: Is This Unloved Defense Stock Ready To Soar?
2021 has been a great year for the stock market thus far. Through the first half of the year, the S&P 500 was up approximately 14.5%. And, this rally has been fairly broad based with just about every sector benefitting from the re-opening and re-flation rally that we’re watching play out as the world emerges from the COVID-19 pandemic. However, one area of the market that has suffered, on a relative basis to the broader market, is the defense sector.
Defense stocks have struggled to keep up with the major averages ever since the election. There is a view in the market that the “blue wave” that we saw play out in November, which gave the Democratic party power to control the House, the Senate, and the Oval Office, is likely to be bad for defense names as more progressive politicians prioritize spending on things like healthcare, social benefits, and infrastructure, as opposed to the defense budget.
However, looking back at recent administrations from both parties, we see that this thesis doesn’t exactly hold up. Regardless of who is in the White House, there has typically been massive spending on defense. National security is a top priority of the majority of elected officials (and especially the U.S. President, being that they are the Commander and Chief of the U.S. armed forces). And with that in mind, we wanted to focus on the largest defense contractor, Lockheed Martin (LMT), to see whether or not the blue chip analysts that the Nobias algorithm tracks believe that this relative underperformer is an attractive buy or not.
We recently came across an article published by The Motley Fool titled “The S&P 500 Is Near an All-Time High, but These Stocks Are Still Cheap” which listed Lockheed Martin as an attractive bargain. The article began by saying, “Another day, another all-time high. The U.S. stock market is on fire and showing no signs of slowing down. When times are this good, it can be easy to get complacent and forget about fundamentals. Or worse, fall prey to the hype of meme stocks and other fast-money facades.” Thankfully, the authors provided picks for investors looking to buy high quality value stocks rather than chase momentum. Lockheed Martin, which is up approximately 7.5% on a year-to-date basis, representing roughly 50% underperformance relative to the S&P 500, was one of the bullish picks.
Daniel Foelber, a Nobias 5-star rated analyst, was one of the trio of authors who collaborated on this piece and in his section of the article, he listed Lockheed Martin as a top pick to consider in what is otherwise an expensive market. He noted that not only have LMT shares underperformed the market during 2021, but “Lockheed and its peers have heavily underperformed the market over the past three- and five-year periods.” However, as Foelber points out, this weak share price performance may be irrational. He says, “Lockheed posted record-high revenue, net income, and free cash flow (FCF) in 2020. Given its dominant performance, investors might be scratching their heads as to why Lockheed is so cheap.”
After all, he continues, “After all, its price-to-earnings ratio is just 15.3. And its quarterly dividend was raised to $2.60 a share, putting the annual yield at 2.7%. With plenty of FCF to support the dividend, Lockheed has the makings of a top-tier income stock.” He highlights the slowing defense budget growth in recent years as a primary concern for investors, being that Lockheed relies heavily on U.S. government contracts. However, he is quick to say, “The company has been able to rise above this challenge. Over the last five years, it has increased revenue at a compound annual growth rate (CAGR) of 6.7%, net income at a CAGR of 5.7%, and FCF at a CAGR of 9%.”
Foelber notes that President Biden’s recently proposed budget included 1.6% defense spending growth and that Lockheed’s “Investments in hypersonic missiles, satellites, and nuclear defense programs [that] make up its space segment” could be the primary sources of the company’s growth. He also notes that “famed growth investor” Cathie Wood, of Ark Invest, recently added Lockheed to her Ark Space Exploration ETF, which has helped turn the sentiment surrounding LMT shares bullish in recent months. Overall, Foelber concludes, “Lockheed seems like a steal at its current price.”
Jason Fieber, a Nobias 5-star rated analyst who posts articles at dailytraderalert.com, also recently covered Lockheed Martin with a bullish light. He discussed Lockheed Martin in his article titled “3 Dividend Growth Stocks Still Priced Below Pre-Pandemic Highs” by saying, “Sovereign defense products and services have always been necessary and always will be necessary. That’s just human nature. Investing in these businesses is almost a total slam dunk over the long run. However, sometimes you’re offered a particularly good opportunity with them, and that could be what you’re looking at with Lockheed Martin.”
Fieber notes, “This stock is currently priced around $385/share. But it was well over $400/share in early 2020.” With regard to fundamental value, Fieber said, “Lockheed Martin produced $21.95 in EPS for 2019, so going into 2020 that’s the earnings number. The company has logged $24.78 in EPS over the last 12 months. EPS is up more than 10% compared to early 2020, yet the stock is down more than 10%. That’s the advantageous disconnect I’m talking about.” He concluded his Lockheed section, writing, “Fundamentally, the business is excellent. They’ve increased their dividend for 18 consecutive years, with a 10-year DGR of 14%. The stock yields 2.7%, which is very attractive in this market. Lockheed Martin is actually one of my top five stocks for 2021.”
Nicholas Ward is a Senior Investment Analyst at Wide Moat Research. He has spent the last 8 years writing about the stock market at various publications, including Seeking Alpha, The Street, Forbes Real Estate Investor, Sure Dividend, The Dividend Kings, iREIT, Safe High Yield, and The Intelligent Dividend Investor.
Valueinvestingnews.com recently covered Lockheed Martin as well. The Nobias 5-star rated contributor also highlighted what they believe to be appealing fundamentals. They wrote, “Lockheed Martin's revenue increased 8 percent over the past trailing twelve-month period versus the previous twelve-month period. Gross margins increased to 15.73% for the first quarter compared to the same period in the previous year, and operating margins increased to 13.67% over the same period. Net earnings for past trailing twelve months were $7008.0 million, up 12% from the prior year.”
Value Investing News continued, touching upon the company’s strengthening balance sheet, saying, “Moving on to the balance sheet, Lockheed Martin’s cash levels jumped 48% for the third quarter over the same period last year. Overall liquidity of the balance sheet, as measured by the current ratio, increased 12.05% this past year. The current ratio for Lockheed Martin now stands at 1.38. The company decreased shares outstanding by 0.87%.” Lastly, they concluded, “In terms of valuation, the stock is trading at a trailing twelve-month price to earnings ratio of 15.63 and price to book ratio of 17.18.”
Right now, the S&P 500’s forward price-to-earnings ratio is north of 22x. With that in mind, it appears that LMT offers an attractive margin of safety. 87% of the credible analysts tracked by the Nobias algorithm agree with the bullish sentiment that we’ve seen posted over the last month. Right now, the average price target provided by blue chip analysts for LMT shares is $413. Today, shares trade for $381.49, which implies upside potential of approximately 8.3%. Adding the company’s 2.75% dividend yield into this equation, we arrive at a situation where double digit returns are possible. During the last month, we’ve seen 5 research reports posted by 4 and 5-star rated Nobias analysts. All 5 of them came with “Buy” ratings on the stock.
Disclosure: Nicholas Ward is long LMT. Nicholas Ward wrote this article for Nobias at their request with a view of giving investors a balanced perspective based on the writings of Nobias highly rated analysts and bloggers. Nobias has no business relationship with any company whose stock is mentioned in this article and does not have a position in this stock.
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Disclaimer: The Nobias star rating is based on past performance results and is not an indicator of future results. These past performance returns do not represent returns that any investor actually earned. Assumptions made include the ability to purchase the stocks recommended by the author under liquid markets where the transaction would be at the market price for the day. In reality, loss in liquidity may have a material impact on the returns that actually may have been earned. Further, returns are calculated without any including transaction costs, management fees, performance fees or expenses, or reinvestment of dividends and other income. This information is provided for illustrative purposes only.